As a contractor, subcontractor or an owner, when you are about to sign a contract, you may not be aware that a variety of options are available to you. In fact, you may have been signing onto the same sort of contract for various sorts of business transactions. Here at Smiley Law, we always want our clients to know about the contracts available to them, so that they can tailor the nature of the contract to their specific needs.
Remember that a contract is simply a deal where there is offer and acceptance. One party promises to do something in exchange for something else. In the construction world, it’s the exchange to perform a service for a sum of money.
Construction contracts are often defined by the form of reimbursement they offer to the contractor. Here are three common contract types you should keep in mind for your next construction deal:
In a cost-plus contract, also known as a cost-reimbursement contract, a contractor is paid for all of his/her necessary expenses stemming from the construction contract, up to a certain pre-negotiated limit, plus an additional payment for profit.
There are several common versions of a cost-plus contract, including cost-plus-fixed fee, where the contractor is paid a pre-determined fee that was previously agreed upon; cost-plus-incentive fee, where the contractor is paid a larger fee for meeting or exceeding performance targets; and cost-plus-award fee, where the contractor is paid a fee based on his performance.
In a fixed-price contract, also known as the lump sum contract, the contractor is paid a total pre-determined fixed price for all construction activities. As opposed to a cost-plus contract, a fixed-price contract does not account for the amount of resources or time used for the project.Fixed-price contracts often include incentives and/or penalties.
Time and Material Contract
In a time and material contract, the contractor will be paid according to the work performed and the material used, regardless of how much total work is required to complete the project. There are some time and material contracts that set an upper cap on total price and duration.
Particularly in the construction industry, where timing and cost may vary greatly depending on the project, the type of construction contract you sign can have an incredible impact on your future earning potential. We recommend you speak to a licensed attorney before picking which contract works for you. Contact the contract attorneys at Smiley Law for all your construction contract needs.